Gold or Glitter?

August 05, 2020 | Jessica Noviskis, CFA, Portfolio Strategist, OCIO Services

Gold prices are hitting new highs, closing above the $2,000 per ounce threshold for the first time yesterday, August 4th. It is a familiar scene amid the confluence of economic concern and uncertainty brought on by the spread of COVID-19, negative real interest rates with 10-year Treasury yields just above 0.5%, a weaker U.S. dollar, and the potential for increased inflation following unprecedented monetary stimulus. But with an asset class that only makes headlines at extreme levels, it is important that investors know what they are really getting.

Over time, gold has produced real returns about in line with Treasury Bills (before any storage costs or impact from rolling futures contracts in contango), but with volatility that more closely resembles the S&P 500. And despite being widely considered to hold its value over time, gold is a physical asset whose price is determined by supply and demand, including ongoing mining operations and a large gold jewelry market in China and India. But what is perhaps most surprising is that gold is actually a poor inflation hedge. Over the last 50 years, the correlation between gold and core inflation has ranged from -0.55 to +0.75, with an average of 0.05.¹ Over time, equities have been the best option for outperforming inflation.¹ Dating back to World War II, gold has only outperformed equities in the short windows when inflation has been categorically greater than 6% (the last of which ended in 1982), and even then only half the time.¹ Thus despite the headlines that gold receives when its price is notably rising, it is not a particularly attractive allocation for long-term investment portfolios.

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¹ Goldman Sachs Investment Strategy Group